Today’s dairy pricing is complex

The rising cost of milk at the grocery store may leave shoppers wondering how dairy product prices are set and how much dairy farmers are paid for their milk.

Prices vary according to the type of dairy product, such as homogenized 2 percent (reduced-fat) milk, yogurt, ice cream, cheese or ingredients in other foods such as pizza. Dairy products usually are separated into fluid and manufactured categories because prices for these products are determined in different ways.

The price farmers receive for raw (unprocessed, unpasteurized) milk largely is determined by two main factors: formulas that set the price for milk components under federal milk marketing orders, also known as FOs, and milk utilization patterns in the region where the farm milk is sold.

The FOs place milk in four classes:

• Class I—milk used in beverages such as skim and low-fat milk, milk drinks, cultured buttermilk, eggnog and milk shakes.

• Class II—includes cottage cheese, yogurt and ice cream.

• Class III—hard cheeses, cream cheeses and other spreadable cheese.

• Class IV—milk made into butter and powdered milk.

The price farmers receive is a blend of those four prices. In addition, payments for milk are pooled and paid to individual dairy farmers or cooperative associations of dairy farmers on the basis of the uniform or average price for Grade “A” milk and/or its components.

State milk marketing boards also affect the price. Eight states, including North Dakota, have milk marketing boards. The North Dakota board’s role is to supervise, investigate and regulate every segment of the state’s dairy industry, including licensing producers, processors and distributors, and setting floors for the prices paid to the producer, wholesaler and retailer of milk products.

Farmers can achieve “quality” factors such as low somatic cell counts, and greater protein, milk fat and other solids to increase the price they receive for their milk. Guaranteeing a certain volume of milk year-round also will generate additional income.

The bottom line is that dairy farmers receive about $1.60 per gallon of milk. However, because farmers must pay the cost of transporting the milk to the processor, which is about 12 cents per gallon, that leaves the farmer with about $1.48 per gallon.

That does not mean dairy farmers are making a profit, though, because they are paying record prices for labor wages and benefits, fuel and feed. The latter is the largest expense; it represents nearly 60 percent of the cost to produce milk.